By Susan A. Schneider, Director of LL.M. Program in Agricultural & Food Law at Arkansas School of law and contributor to the Agricultural Law blog.
Earlier this year the USDA finalized the regulations for a new “microloan” program that will provide loans up to $35,000 to family farm operations. Secretary Vilsack stated in a press release that the new program “is aimed at bolstering the progress of producers through their start-up years.” The microloan program promises a less burdensome and more simplified application process than is usually associated with farm loans.
Access to capital can be difficult for farmers who are just starting out. Lenders often want to see a history of success, with years of positive cash flow, before making a loan. Farmers who want to operate in a way that differs from traditional production agriculture face an even higher burden. For example, loan officers may not understand or appreciate organic practices. They may feel that the loan is too risky. And, minority and women farmers, termed “socially disadvantaged” farmers by the USDA, may face the added problem of discrimination.
As Secretary Vilsack observed, “I have met several small and beginning farmers, returning veterans and disadvantaged producers interested in careers in farming who too often must rely on credit cards or personal loans with high interest rates to finance their start-up operations.”
The USDA direct farm loan programs can be extremely important in these situations. These programs are administered by the USDA Farm Service Agency (FSA), and only family farm-sized operations are eligible. Some loan funds are targeted to beginning farmers and some to “socially disadvantaged” farmers. The goal is to provide needed resources at low cost, helping to increase equity so that the borrower is eventually able to graduate to commercial credit. One of the eligibility requirements is that the farmer has been turned down by another lender. Interest rates are low and the terms generous.
In the past, the FSA direct loan programs were largely designed to serve the traditional production agriculture model. As farm size increased and agriculture became more capital intensive, beginning farmers needed larger and larger loans. The risks associated with such a large debt are significant. Even the paperwork involved can be intimidating.
The microloan program takes a different approach. It recognizes that many new farming operations are choosing a different model of production. They are starting small; they are minimizing their equipment needs; and they are doing without expensive inputs. But, they still need credit – just not as much.
The microloan program is designed for these farming operations. Farmers can apply for a maximum of $35,000 to pay expenses for improvements such as hoop houses to extend the growing season, to purchase farm tools, to install irrigation equipment, to buy delivery vehicles, or to pay annual operating expenses such as seed, rent, marketing efforts, even utilities. For larger financing needs, farmers can apply for loans through the traditional FSA direct loan programs or obtain financing from a commercial lender under FSA’s Guaranteed Loan Program.
The USDA reports that since 2009, the FSA has made more than 128,000 loans totaling nearly $18 billion. The number of loans to beginning farmers and ranchers has increased from 11,000 loans in 2008 to 15,000 loans in 2011. More than 40 percent of USDA’s farm loans now go to beginning farmers. Lending to socially-disadvantaged producers has increased by nearly 50 percent since 2008.
Producers interested in applying for a microloan can read about the programs on the USDA FSA Loan Program website and then contact their local Farm Service Agency office.
Professor Susan A. Schneider teaches agricultural and food law courses at the University of Arkansas School of Law and serves as the Director of the unique advanced legal degree program, the LL.M. Program in Agricultural & Food Law. Schneider was raised on a family farm in Minnesota and has devoted her legal career to work in agricultural and food law. Her private practice experience includes agricultural law work with firms in Arkansas, Minnesota, North Dakota, and Washington, D.C. as well as service as a staff attorney at Farmer's Legal Action Group Inc. (FLAG). She now serves on the FLAG Board of Directors. She is a past president of the American Agricultural Law Association (AALA) and was the recipient of the 2011 AALA Distinguished Service award. She is a frequent speaker at agricultural and food law conferences. Professor Schneider is a significant contributor to the Agricultural Law blog. Her twitter account @aglawllm is followed by many interested in agricultural and food law issues.